Guide to section 80C deductions

All the investments, expenditures you can claim as tax break under Section 80C

Most of us are already well aware of the deduction available under section 80C of the Income tax Act, 1961. The maximum amount of deduction that can be claimed under section 80C is Rs 150000 for FY2015-16. The section offers various investment options to the taxpayer which not only generate returns for him but can also be claimed as deduction while calculating total taxable income.

Majority of people invest in life insurance policies, PPF, ELSS etc. in order to avail this deduction, but there are several other options too which are worth considering. Deduction under Section 80C is not only available for investments but also for specified expenditures made by the tax-payer. However, in order to claim the deduction for a particular financial year you need to invest/spend the deductible amount in that financial year.

Here’s a list of different investments and expenditures which can be claimed as deduction by the taxpayer under Section 80C.

Provident Fund (PF) & Voluntary Provident Fund (VPF)

A part of your salary is deducted monthly as your contribution towards PF. The total amount deducted annually can be claimed by you as deduction while computing your total (taxable) income. An employee can increase this contribution if he is willing to get a less take-home salary. This additional contribution is called VPF and is also eligible for deduction under Section 80C. The interest earned up to 9.5 per cent is tax-free and anything over and above it will be taxed as your salary income.

So if you don’t want to get into complications of choosing and buying the most appropriate investment option to avail tax benefits, then you can simply increase your VPF to make it equivalent to Rs 150000.

Public Provident Fund (PPF)

PPF is a scheme provided by the government and the investment in it is eligible for deduction under Section 80C.
You can invest as low as Rs 500 and as high as Rs 150000 in a financial year. The current rate of interest is 8.10 per cent tax-free (compounded yearly) and the normal maturity period is 15 years. A point worth noting is that the interest rate is assured but not fixed.

Life insurance Premiums

Any amount that you pay towards life insurance premium for yourself, your spouse or your children can also be included in Section 80C deduction. Please note that the premium paid by you for your parents (father/ mother/ both) or your in-laws is not eligible for deduction under Section 80C. If you are paying premium for more than one insurance policy, all the premiums can be included. It is not necessary to have the insurance policy from Life Insurance Corporation (LIC), even insurance bought from private players (registered under Insurance Regulatory and Development Authority of India or IRDAI) can be considered here.

Equity Linked Savings Scheme (ELSS)

There are some mutual fund (MF) schemes specially created to offer you tax savings and these are called Equity Linked Savings Scheme (ELSS). The investments that you make in ELSS are eligible for deduction under Section 80C. This is one of the best ways to grow your money and enjoy tax benefit simultaneously as the return generated by ELSS is much more than those generated by other investment products.

Home Loan Principal Repayment

The Equated Monthly Installment (EMI) that you pay to repay your Home Loan consists of two components – Principal and Interest. The principal qualifies for deduction under Section 80C. Even the interest can save you significant income tax, but that would be under Section 24 and section 80EE of the Income Tax Act.

So if you have an outstanding home loan in your name, then the repayment of the principal amount made by you in a financial year can be claimed as deduction under Section 80C and you need not invest in other products specifically to avail tax benefits.

Further, any payment made to development authorities like Delhi Development Authority (DDA) in order to purchase a house (which has been allotted to you in a scheme made in this regard) also qualifies as deduction under section 80C.

Sukanya Samriddhi Account

In this scheme, you can open an account on behalf of your minor daughter. Any amount deposited in this account would be eligible for deduction under Section 80C. Further, this account can be opened for a maximum of two girls and in case of twins this facility will be extended to the third child as well.

The amount has to be deposited in this account for 15 years. The account will be mature after 21 years, which means that you don’t have to deposit anything between the 16th and 21st year.

The minimum annual deposit is Rs 1000, which can go up to Rs 150000.

Interest rates on the deposit keep on changing every year. For FY2014-15 it was 9.1 per cent per annum, for FY2015-16 it was 9.2 per cent p.a. and for FY2016-17 it is 8.6 per cent p.a. The interest earned here is also tax-free.

National Savings Certificate (NSC) (VIII Issue)

NSC is a tax-saving instrument with a maturity period of five years. A person can purchase an NSC for as low as Rs 100. Any investments in NSC are eligible for deduction under Section 80C. At present, the interest rate is 8.10 per cent p.a. This interest is compounded half yearly and is taxable. However, this being a cumulative scheme (i.e., interest is not paid to the investor but instead accumulates in the account), each year’s interest is considered reinvested in the NSC. Since it is deemed reinvested, it qualifies for a fresh deduction under Section 80C, thereby making it tax-free. Only the final year’s interest, when the NSC matures, does not receive a tax deduction as it does not get reinvested, but is paid back to the investor along with the interest of the previous years and the capital amount.

So in a nutshell, the interest earned every year, except the last one, is tax-free.

Infrastructure Bonds

Also popularly called Infra Bonds, these are issued by infrastructure companies, not the government. The amount invested in these Bonds can also be included in Section 80C deduction.

Five-year Bank Fixed Deposits (FDs)

Any term deposit with a tenure of at least five years with a scheduled bank also qualifies for deduction under section 80C and the interest earned on it is taxable.

Senior Citizen Savings Scheme 2004 (SCSS)

This scheme, as the name suggests, is meant only for senior citizens.

Any individual in the 60 or above age group can open an account under this scheme. An individual above 55 but less than 60, and having retired under a Voluntary Retirement Scheme or a Special Voluntary Retirement Scheme, can also open an account under this scheme, but such an account must be opened within three months of the retirement date.

If you are retired defence personnel, then you can open this account without any age limit, provided you fulfill other specified conditions.

Any investment in this account would be eligible as deduction under Section 80C. The current annual rate of interest offered under this scheme is 8.6 per cent payable quarterly. Please note that the interest is payable quarterly instead of compounded quarterly. Thus, unclaimed interest on these deposits won’t earn any further interest and also the interest earned is chargeable to tax.

Five-year Post Office Time Deposit (POTD) Scheme

POTDs are similar to bank fixed deposits. They are available for different time durations like one, two, three and five years but only five-year POT qualifies for tax-saving under section 80C. The interest rates offered by them is compounded quarterly, but paid annually.

Please note that the interest earned is entirely taxable.

NABARD Rural Bonds

The NABARD Rural Bonds issued by NABARD (National Bank for Agriculture and Rural Development) also qualify for deduction under section 80C. These bonds are tax-free and also offer decent interest rates.

Unit linked Insurance Plan (ULIP)

An insurance product which covers life insurance and also provides the benefits of equity investments, Ulips have attracted the attention of investors and tax-savers because of their multiple advantages -life cover, tax-saving and also helping you grow your money by giving decent returns in the long-term.

Payment of Tuition Fees

Paying your kids’ school fees is an expenditure which can’t be ignored. Now imagine that the amount paid by you as tuition fees (excluding development fee of donation amount), whether at the time of admission or thereafter, is eligible as deduction to you and will help you save tax.

Please note that the fees should be paid to a school, college, or university in India only.